Investment Thesis
SentinelOne, Inc. (NYSE:S) is out of favor with investors. And it's easy to see why. This is a growth stock. And growth stocks get killed when they pull in their growth guidance. And that just makes sense.
But I declare that my investment thesis has less to do with its revenue growth rates, which although important aren't where my thesis is based. I argue that in less than twelve months you'll be eyeing up a very different SentinelOne business.
This business will be profitable, reporting free cash flows, with no debt, and growing in the high 20s% CAGR.
I believe that SentinelOne's stock will reach a Price Target of $40 per share by the summer of 2025. This stock today is a steal.
Rapid Recap
Six months ago, I wrote a bullish article on SentinelOne where I said,
SentinelOne's stock is very attractively priced if it reaches my assumptions. Also, relative to its market cap, I believe that SentinelOne's debt-free balance sheet is the most attractive relative to its peers.
As you can see above, the stock has been down since my original recommendation. More specifically, SentinelOne's stock is down 27%, while the S&P 500 (SP500) is up 14%. A very frustrating performance, have no doubt.
However, with time, you'll see that despite my original mistiming, the company's path to profitability has significantly improved. So, let's get to it!
Important Context
Together with its recent fiscal Q1 2025 earnings results, I said,
I recognize that you may believe I'm being too aggressive, but for now, I continue to believe that SentinelOne will reach $40 per share by summer 2025.
I know that this seems hard to believe. But SentinelOne will move dramatically higher in the coming twelve months. Yet, if you look at the share price today, I know this seems difficult to believe.
But I know this setup really well. The market doesn't care about a stock. Even though the company is making all the right moves. I've seen it happen so often, that people become bored and uninterested.
I saw it with Robinhood Markets, Inc. (HOOD), I saw it with AppLovin Corporation (APP), with Palantir Technologies Inc. (PLTR) I saw it with Hims & Hers Health, Inc. (HIMS) (although this last one really was painfully long and frustrating). But I've seen this happen numerous times before.
People become uninterested in a company. They chase something else. However, provided the free cash flow prospects continue to move higher, you can be confident, that the share price will move higher and the stock will reprice higher. Even if today, it appears too far-fetched an idea.
Why SentinelOne? Why Now?
SentinelOne offers advanced security solutions through its Singularity Platform, which simplifies security management and reduces costs. It is a leader in the industry, outperforming both traditional and modern security systems, alongside CrowdStrike Holdings, Inc. (CRWD). Compared to CrowdStrike, SentinelOne focuses on cost efficiency and a holistic approach, while CrowdStrike is known for threat intelligence and response.
SentinelOne is experiencing growth, particularly among large enterprises, with a 30% increase in customers generating over $100,000 annually. This growth reflects their ability to reduce complexity and optimize costs for their clients.
Despite its strengths, SentinelOne faces challenges in improving its go-to-market strategy and integrating new products. The company is balancing the need for profitability with investments in AI and data security to stay competitive with CrowdStrike.
Given this background, let's delve deeper into my investment thesis.
SentinelOne Lowered Its Guidance for Fiscal 2025
SentinelOne is expected to deliver about 31% CAGR this year. This is very fast growth. I recognize that this is practically the same growth as CrowdStrike and since SentinelOne has a lot fewer revenues, this causes many investors to believe that SentinelOne's growth rates are petering out. Admittedly, I also have this consideration.
But I also believe that the comparables that SentinelOne is coming up against from the prior year are more challenging and playing a role here too.
In sum, this is what we know, that demand for cybersecurity is strong and that the two leading companies are growing at a very rapid rate. This is the sure thing we should take away from this section.
How fast can SentinelOne grow into next year? I believe that we can easily bank on at least the high 20s percentage. After all, we've already passed the most difficult comparable quarter, which was fiscal Q1 2024. Starting with fiscal Q2 2025 (its current calendar quarter), and beyond, the comparables will ease up, which will allow SentinelOne's growth rates to improve naturally. This is an excellent setup.
Next, we'll discuss its valuation.
SentinelOne Stock Valuation -- 7x Sales
I do not believe that a P/Sales metric is particularly helpful in informing you of whether a stock is cheap or not. But what I do believe it tells you, rather accurately, is where investors' sentiment is at.
As I look at SentinelOne's P/Sales ratio from the past 12 months, I have little doubt that sentiment is very low right now.
And now, here's the core of my thesis.
The business has made an astonishing improvement in its underlying profitability, to move its non-GAAP operating margin from negative 38% to negative 6% in fiscal Q1 2025.
That's a whopping 3,200 basis point improvement in 12 months. And they've done this dramatic improvement in profitability without meaningfully sacrificing their growth rates.
This fact alone demonstrates that SentinelOne's product is being much better monetized. Next, consider this.
What you see above is that in last year's fiscal Q2 2025, SentinelOne's non-GAAP operating margins stood at negative 22%. And this year it's expected to improve to negative 6% (1,600 basis point improvement y/y).
My point in all this is that SentinelOne is very likely to reach breakeven either at the end of this fiscal year or, perhaps, very early in fiscal Q1 2026 (meaning in 3 quarters time).
Investors will be left eyeing up a company that will probably burn a maximum of around $40 million more in free cash flow. And most likely not even that sum. And then, entering the next fiscal year, SentinelOne will be left with about $1 billion of cash on its balance sheet and no debt. That's a lot of cash, even for a public company.
And moreover, while I suspect that in fiscal 2025, SentinelOne will deliver 30% top-line growth, but to err on the side of caution, let's assume SentinelOne grows around high-20s% CAGR. A profitable, rapidly growing business with no debt. I believe that this will trade at 10x to 12x sales, or around somewhere near $12 billion market cap, with $1 billion of cash and no debt.
The Bottom Line
Based on SentinelOne's impressive fundamentals and rapid progress in profitability, I firmly believe in its bright future.
Despite current investor skepticism, SentinelOne is poised to become a profitable company with significant free cash flows and no debt within the next year.
The company has demonstrated an astonishing improvement in its non-GAAP operating margin, moving from negative 38% to negative 6% in just twelve months, without sacrificing growth rates.
With expected growth in the high-20s percentage CAGR and strong market demand for cybersecurity, SentinelOne's potential is immense. This solid foundation and momentum make SentinelOne an attractive investment opportunity, and I confidently project its stock to reach $40 per share by summer 2025.
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